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Conventional loans are the most common type of mortgage loans: They account for more than 70% of all mortgages for new homes. You can apply for a conventional loan from any mortgage lender, including banks, credit unions, or online lenders.
There are two types of conventional loans. Conforming conventional loans apply to homes valued at under $726,200 (in most parts of the country). Jumbo non-conforming loans are for higher-priced properties.
Conventional loans are often a better deal than non-traditional home mortgages. However, this is one of the types of mortgages that can be difficult to qualify for. Keep reading to learn about the types of conventional loans, their benefits, and the application process.
A conventional loan is a type of home mortgage loan that is not backed by federal mortgage assistance. Many home buyers prefer conventional loans because they do not carry many of the fees charged with government-backed loans.
In a conventional loan, the mortgage lender risks losing its funds if the buyer is unable to pay off the loan. That's why it can sometimes be more difficult to qualify for a conventional loan.
By contrast, several federal programs offer loan insurance for non-conventional loans. The Federal Housing Administration (FHA), Veterans Administration (VA), and U.S. Department of Agriculture (USDA) are just a few government agencies offering these types of assistance to lenders. Unfortunately, this added insurance for the lender often comes with an added cost to the home buyer. That's why government-backed mortgages often come with more fees than conventional loans.
A conventional loan can be used to purchase a single-family home -- or, if you prefer, it can cover the cost of buying a condo or townhouse.
Conventional loans are often confused with conforming loans. A conforming loan is actually one of the two types of conventional loans:
Fannie and Freddie are government-sponsored entities that purchase mortgage loans on the secondary market. As of 2023, their loan limits were $726,200 in most parts of the United States.
There are a few important steps to take when opening a conventional loan. Fortunately, with the help of a loan provider, these steps are fairly straightforward.
When you apply for a mortgage, your lender will make recommendations for what type of home loan is best for you. You will probably need to submit proof of income and assets if you decide to apply for a conventional loan. The lender will decide whether to approve you based on this information. It will also use this documentation to determine your interest rate.
Conventional loans could have a fixed interest rate or an adjustable interest rate:
Lenders use many factors to set your mortgage rate. These include:
You can also buy down your rate by paying points, or prepaying interest upfront. Points cost 1% of your mortgage amount and each reduces your rate by 0.25%.
Most lenders allow you to find out both your rate and the amount you can borrow before moving forward. This is called getting pre-approved for a mortgage. You can compare mortgage rates by applying for pre-approval with multiple lenders. When you find a loan that works for you, you can formally apply for a conventional loan. The lender will complete the approval process at that point. The formal process includes an appraisal of the home you're buying to ensure it can serve as collateral.
If all goes well, you'll close on your loan. The lender will provide detailed documents about the total repayment costs. You'll make monthly payments with your lender -- or to another loan servicer if your loan is sold -- until your home loan is fully repaid.
Conventional loans often have stricter qualifying criteria than government-guaranteed loans. This is because there's an increased risk of losing money if you default on your debt.
Qualifying criteria vary from lender to lender. Some common requirements include:
Most conventional mortgages require that you pay private mortgage insurance (PMI) if you don't put at least 20% down when you purchase your home. For example, you'd have to pay PMI if you buy a $400,000 home and borrow more than $320,000. PMI protects your lender from loss in case of foreclosure.
Although you pay for PMI, it benefits only the lender. If you can't pay your mortgage, PMI doesn't help you. Avoiding PMI is usually a good idea if you can. But if you do need PMI, don't stress. It's not always easy to come up with a 20% down payment, especially if you want to buy a home in a high-cost-of-living area.
Private mortgage insurance is usually priced between 0.5% and 1% of the amount you borrow. This amount is added onto your mortgage payments, and you'll have to pay it until your lender automatically removes it. Usually, this happens once your home loan balance hits 78% of your home's original value. If your lender doesn't automatically remove it, you may need to request to stop paying. You can usually ask for this after your balance hits 80% of your home's current appraised value.
There are some lenders that offer special mortgages without PMI insurance. You could potentially avoid PMI if you take out one home loan for 80% of the home's value and then get a second loan to cover the 20% down payment (this is called an 80-20 loan)
Mortgage insurance isn't unique to conventional loans: It's required on some government-backed loans for less-qualified borrowers as well. For example, the VA doesn't require mortgage insurance, but the FHA does. And unlike conventional loans, which usually only charge annual premiums paid monthly, on FHA loans you have to pay both an upfront and annual mortgage premium. FHA mortgage insurance may also be required for a longer period of time -- sometimes for the life of the loan, depending on the amount of your down payment.
There are some significant benefits to conventional loans, including the following:
Here are some other questions we've answered:
If you're a first-time home buyer, our experts have combed through the top lenders to find the ones that work best for those who are buying their first home. Some of these lenders we've even used ourselves!
It certainly can be, but if you're a first-time buyer and you have a so-so credit score, not much money saved for a down payment, or both, FHA loans are worth considering. Get quotes from mortgage lenders for both mortgage types and see which is a better fit for you and your financial situation.
It depends on where you live. The upper limit for a conforming conventional loan in Alaska, Guam, Hawaii, and the U.S. Virgin Islands is $1,089,300 in 2023.
Yes, they often do. Rightly or wrongly, many sellers (and their real estate agents) believe that government-backed mortgages are more difficult to close, due to more stringent requirements for inspections and appraisals. Also, since government-backed mortgages have lower credit score and down payment requirements, sellers may believe that buyers with conventional loan pre-approval are in better financial shape and more likely to complete the sale.
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